Monday, October 31, 2011

Most people are able to go about their lives without even the sketchiest understanding of quantum physics. To lack even an intuitive comprehension of classical Newtonian physics is a far more dangerous disposition however.

Until recently something very comparable applied to the world of economics. Most people could get on with their daily lives as producers and consumers of goods and services and not really have to give much thought to the weird underlying reality constructed out of semi-comprehensible securities, credit default swaps, CDOs, quantitative easing etc. etc.

Yet rather like a scientist who wakes up one morning with the premonition that the quantum world is the primary one and that everything else we perceive around us mere epiphenomena, I had a similar awakening myself with regards to the structure of 'late stage capitalism' around the middle of the last decade.

Surrounded by marketing people who thought of their own role in life as the most creative and fascinating part of the whole supply chain, I started to pity them for the bottom-feeders that they now appeared to me to be. For suddenly nothing was as it had always seemed: economics, politics and society in general was revealed as inexorably emerging from the hidden reality of high finance. And then in 2008 it stopped being quite so hidden.

There can hardly be a citizen in a major western democracy who is not now aware now how their world really works. Millions have been deprived of the illusion of usefulness (and not just PR and marketing people!). Can anyone deny that over the course of the last three years our leaders have made all other social and political goals subsidiary to that of maintaining the solvency of our banks? And however much we moan about this, if they hadn't, we'd have a lot more to moan about.

This is why the US markets responded so positively to news of the latest Eurozone fudge at the end of last week. This new plan is likely to accelerate the pending recession across the old world but, lets be clear, America doesn't care. These Frogs and Krouts are competitors after all. The current American administration cares about two things only. Postponing any day of reckoning beyond the 2012 Presidential election, and preventing a 'credit event' with global economic consequences. If the Europeans can find a way to sink themselves without affecting everyone else, so much the better...

Thursday, October 27, 2011

Given that the can has now been kicked further down the road than I can be bothered to gaze, (right into the kind of distant mirage one habitually witnesses when traversing Florida's 'Aligator Alley'), I shall signal a break from this series of posts, by quoting the last sentence of Michael Lewis's Boomerang:

"As idiotic as optimism can sometimes seem, it has a weird habit of paying off."

Town mouse visits country mouse, whereby both discover just how deeply messed up they are, setting off a chain of events involving sado-masochistic cruelty that's pretty full-on even for a South Korean revenge flick.

The delightful bleakness of this film results from its insistence that while the provinces are full of violent, petty-mined retards, the metropolis breeds soulless egotistical misanthropes. As this is not an environment in which redemptive arcs can take place, there are only one or two brief glimmers of real kindness: in the person of a boatman and a bank employee, as well as the more problematic case of a puta, whose fate on the island was one many questions we were left with.

In western stories, even when good doesn't precisely triumph over evil, some sort of stasis triumphs over chaos, but in most Korean movies of this sort, normality rarely achieves ascendency at any stage in the narrative. Chaos reigns. Revenge is usually the only thread that runs through from beginning to end, and it habitually presents a disturbingly amoral spectacle. One is never quite certain where the chain of events is heading, plot and character become detached along the way, then recombine in new forms, and the endings, are typically announced (if indeed announced at all) with a zap of very black humour.

In this particular instance we were left with a sense that the overall experience had been thoroughly satisfying, even though the story had once again failed to resolve in any of the familiar ways.

Knowing that the Germans wanted to treat the Greeks to a number one haircut and that the French preferred to see them sporting a fashion-friendly number three, I could have told you a week ago that they would settle on a number two.

As soon as this compromise had been announced, and the banks and other bond holders were facing up to a 50% 'voluntary'* decapitalisation of their Greek paper, Klaus Regling, boss of the European Finances Seriously Fucked fund (EFSF) was off to the airport in order to board a plane to Asia in the hope of spreading the contagion as fast and as far as possible. I hear that in Asia people wear surgical masks conscientiously in order to indicate to passers-by that they could be infectious. Somehow I doubt that Herr Regling was wearing one of these.

Back in the days before the Lehman Brothers collapse the very last people to buy subprime-backed bonds were nearly all Germans. Now the Germans themseles have to hope that there are fresh territories full of even more ingenuous financial patsies out there in Russia, China, Brazil etc.

However this ends up being funded, the impact on EU financial institutions and the flow of credit will be marked. The markets might have been relieved by the noises coming out of Brussels last night, but those pesky economists have been rather less impressed. Carl Weinberg of High Frequency Economics for example, predicts a double digit drop in Eurozone GDP across the funding period:

“Seen from the funding side, the euro package will divert €1,300bn worth of savings from private sector investment and spending. That must mean a reduction of Euroland’s €9400bn GDP by €1300bn, or 13.8 per cent over the period in which it is financed."

* Up in the land of licentious litigation there will be people taking legal counsel about their credit default swaps today.

Wednesday, October 26, 2011

There's a new movie out in UK cinemas right now, Stephen Sodebergh's Contagion, the subject matter of which is a biological rather than a financial pandemic. I was however interested to hear the director's stated opinion that when the time comes, when thousands if not millions of lives are threatened by some nasty little microbe, we, humanity, will inevitably find a solution.

Broadly the same idea was worked into the teleplay for this week's The Walking Dead (again, not in fact a documentary about a sizeable portion of the world's developed economies) in which a character referred to the zombie apocalypse in rural Georgia as just another one of those blips in human progress which we seem to be able to muddle through.

And this set me thinking how we do seem to have this underlying apprehension that all major problems have some sort of solution...as long as we put our thinking caps on and kind of douse them in our collective output of opinion. Yet the euro crisis has all the makings of a properly intractable difficulty.

A last word on the sort of cultural change which might save the day; not, I'm afraid to say, a particularly optimistic word. In Boomerang, Lewis identifies the current euphemism used to describe the kind of miraculous transformation which would make Greek people more like German people: structural reform.

He goes on to point out sagely that this kind of personality about-face can rarely happen quickly enough to be relevant to what actually transpires. I would add that most forms of significant cultural change are organic, which means that individual-level mirror-gazing, combined with promises to be less selfish, myopic, reckless etc. are ultimately akin to attempts to reseed a rainforest by systematically planting individual trees.

Monday, October 24, 2011

"If there were any justice in the world the Greek bankers would be in the street marching to protest the morals of the ordinary Greek citizen." (Michael Lewis)

I've read up enough on the Greeks recently to have to resist the urge to get on the next plane to Athens and start chucking those petrol bombs back at them. And I'm not especially well disposed either to those masked Italian protestors brandishing 'We are the 99%' banners.

Lewis's book amply demonstrates the human need to pin the blame. His visits to countries affected by the current crisis, which he likens to financial disaster tourism, also show us that — depending not just on our political biases, but also on our national cultural backgrounds — we tend to look in different directions for our scapegoats. Only the Irish seem to have been collectively flummoxed by the question of who is actually to blame. For everyone else it is really simple: investment bankers, dodgy politicians, the 1%...not me. (Been thinking of getting myself one of these t-shirts.)

In truth cheap money brought out the worst in everyone, and what we have witnessed is perhaps the greatest flowering of human folly in the modern era. And to my mind a good deal of the populist protest sentiment, whether Tea Partyist or OWS, is just another expression of this absurdity, though one can appreciate the levels of frustration that seem rise in parallel with our collective improvidence.

Technological change has surely played a major part in all this, because it is that much easier to be immoral (or at least recklessly irresponsible) when you are sitting behind a computer screen. But lets not blame our tools eh?

Greece has had what Lewis describes as a societal level moral collapse, and when that happens there really are no political solutions, only cultural ones. And these are of course incredibly hard to introduce as piecemeal policy measures.

Of course Greece is only an extreme case of what has happened on a far more international level. Guatemala may not have been exactly flooded with cheap credit over the past decade or so, but it's hard not to examine the state of its political and social affairs without considering the wider context of a global ethical malaise. It's enough to make one turn to religion. Well, not quite.

Anyway, I'm not really buying the argument of Marshall Auerback (The Myth of Greek Profligacy, Counterpunch) that all attempts to paint the Greeks as deadbeats are "nonsensical propaganda, designing to justify the continued collective execution being inflicted on Athens for the sins of its father and grandfathers. As if Greece is the only country ever to cook its books in the European Union!"

Of course European monetary union has always implied a degree of book-cooking. But just to gain entry to the single currency Greece had to commit grand fraud — pretending that their budget deficit was 3% when it was in fact 15% — a situation which was only fully revealed once the IMF had had a chance to de-manipulate all the numbers and uncover some of the expenses which had been simply shifted out of the accounts to prepare the way for euro membership.

As with much of the sub-prime lending that went on prior to 2008, it must have been obvious to quite a few people (who should now feel thoroughly ashamed of themselves) that Athens was utterly crooked and therefore a very bad bet.

And some of the usual suspects from across the pond quickly became involved to make things even worse: Goldman Sachs reportedly took $300m in fees for fixing up some suspect loans which helped the Greek government to disguise its real level of indebtedness. The Wall Street men also taught the Greeks how to securitise future income streams from things like the lottery and motorway tolls, so they could spend cash up front from revenues yet to be received. As individual blame connected with collective blame, local blame duly connected with global blame.

Sunday, October 23, 2011

At 12m, the population of Greece is roughly equivalent to that of Guatemala, though the Greek economy is around four times as large. This hasn't stopped the denizens of that Mediterranean land from running their taxation system along Third World lines.

While researching Boomerang in Athens, Michael Lewis had a coffee with a disgraced, formerly whistle-blowing tax inspector who made a point of pointing out how the waitress in the smart hotel cafe in which their interview was being conducted, had singularly failed to supply the author with a receipt.

Sales tax avoidance is of course rife here in Guatemala, though the standard method is a little less flagrant; one could even say a little more sophisticated. For many of the retailers in this town (big international operators like McDonalds included) provide customers with receipts which appear to have been printed using ink which fades to illegibility within a day or so of the purchase.

In Greece as in Guatemala, sales tax is only so important because only a minority are in a position where income tax is much of a bother to them. (Usually only salaried employees). Lewis explains how Greece has the largest number of 'self-employed' workers in the Eurozone, most of whom, including surgeons earning millions of euros have no problem reporting their annual income as €12,000 thereby entitling themselves to the 0% tax rate. In fact two thirds of Greek doctors pay no income tax at all, though presumably they have to expectorate the odd bribe or two.

There are laws against tax avoidance in Greece, but enforcing them would apparently mean imprisoning almost every single doctor in the country. And quite possibly each and every member of the 300-strong Greek parliament as well, because it has been revealed that not a single one of them is being taxed on the real value of their properties. And we Brits were indignant when our MPs started building duck ponds off the back of their Parliamentary expenses!

The similarities with Guatemala reemerge when Greece's system for taxation based on real estate values are considered, though the Greeks also lack a proper national land registry. Properties have a computer-generated 'objective' value and as prices have risen these have tended to stay static. The difference is usually paid in cash, with only the formula-driven value reported to the revenue collectors.

Here in Panorama, real estate values have increased quite dramatically over the past thirty years since our colonia was founded. Many of the original residents would have a real problem paying the annual impuesto de inmueble based on any kind of 'real' valuation, and so a variety of techniques exist for keeping the burden both manageable and, you might say, equitable.

Firstly, any legal documents relating to sales or transfers attempt to preserve the valuation dating back to the 80s. Lots with houses on them are often reported as baldíos for tax purposes. Inheritances can be handled as sales within the family whereby the children are sold plots (often by pre-deceased parents) at bargain prices, which are then solidified in the associated paperwork. And in general Guatemalan citizens like to hold their central and local governments to ransom by not offering up their accumulated tax debts until the last possible moment, in the hope of extracting some sort of special offer — such as pay up now and we'll offer you a moratorium on the mora (fine), you can pay by installments etc.

As a consequence of all this the Guatemalan government collects revenues equivalent to just 11% of GDP. Even the Greeks can manage three times that at 33%, but given the fact that their economy is four times as large, one has to assume they have more people in a position to contribute if the inclination somehow grabbed them.

Michael Lewis however concludes that the evasion of taxes is likely to remain endemic in Greece, in part because it's hard to enforce a prohibition against such a widespread abuse, and in part because any cases that do make it to court, take an average of fifteen years to prosecute. As the tax collector reported to him...

"The Greek people never learned to pay their taxes. And they never did because no one is punished. No one has ever been punished. It's a cavalier offence — like a gentleman not opening a door for a lady."

Saturday, October 22, 2011

In Greece the banks didn't sink the country. The country sank the banks — Michael Lewis, Boomerang.

Greece's bankers were amongst the most conservative in the Eurozone during the last decade. They somehow neglected to award themselves huge sums of money and stayed well away from the American subprime scene. (In fact the worst bet they made was on their own government.)

Instead you could say that the people earning whopping, unjustifiable bonuses over there can mostly be found working for the state: the average public sector worker in fact earns three times as much as the average private sector one, and has seen his or her pay double in real terms over the past 12 years — bribes not included, as Lewis helpfully points out.

The state-owned railway company has to offset a wage bill of €400m and other outgoings totalling €300m against its annual revenues of €100m. Meanwhile its average employee earns €65,000 a year and expects to retire at 55.

So it's not just the lenders who are going to need to take a 'haircut' if the Greek situation is to have any meaningful resolution. To those who say that austerity is the not the right approach the current global financial crisis, I would say that in the case of the Greeks, oh yes it is.

So, while one can begin to sympathise with the Germans when they peevishly suggest that Greece should sell a few of its islands to help meet its obligations, all this would really achieve is leave them with fewer assets and a reduced 'export' income from tourism next time the debt gets out of control, as it most surely will, unless significant adjustments are made to the corrupt and wasteful Greek state.

Anyway, Lewis's excellent new book serves as a reminder that it is too easy to blame the bankers for this whole mess we're in (even the ones who were fishermen just a few years previously). Cheap credit created temptations and exaggerated behavious across whole sectors of society.

He likens it to locking whole nations in a dark room with a pile of borrowed money. Each succumbed to a different temptation...

"What the Greeks wanted to do once the lights went out..was turn their government into a piñata stuffed with fantastic sums and give as many citizens as possible a whack at it."

Had to tap myself on the head a few times this week listening to the hacks from up in the imperio yanqui querying the manner of Moammar Gaddafi's death.

After all, he had only just narrowly avoided America's chosen method of liquidation for what their President has described as 'Arab leaders' (and anyone else who happens to be in the vicinity, and regardless of whether they carry a US passport.)...the unmanned drone attack.

Well, that and a French bomb, one or both of which may represent a fictitious attempt to share the praise/blame.

That some random Libyan should choose to put a bullet in the hated tyrant's head in the middle of a war zone after 42 years of misrule and eight months of civil strife, in which said dictator passed up on a number of clear opportunities to vacate, has somehow become the cause of a great deal of tut-tutting.

Friday, October 21, 2011

Over the course of the past few years we have been repeatedly netflixed by the lady who runs the shop right in front of our house.

Each time we show any kind of propensity to repeat purchase specific items over the medium term, she raises the price of said items*, presumably for us only — so more or less the opposite approach to the coupon schemes run by the big UK chains like TESCO.

And whenever this happens I stop buying the item in question forthwith, as if to demonstrate that the apparent convenience offered by her tienda (if I tripped up on the cobbles outside my front door I'd probably end up at her counter) will not so easily translate into economic captivity.

Now I'm not a total codo — I can spot a value-added shopping experience when I see it (Waitrose over Tesco say) — it's just that I am not really seeing it here. And unlike our old friend in Federal lock-up, I don't have an inherent problem with differential pricing schemes, even 'gringo' prices (though V has actually had the worst experience of hikes), it's just that I don't care to be gamed in this way, and would have thought that our response might have put a stop to it by now.

We're down to a few items where the opportunity for opportunistic margin grabbing are limited; eggs for example. I stopped buying milk there last week when she upped the price by another Q0.50, thereby handing the Bodegona a 20% price advantage.

When it comes to the afternoon bread session, I try to intercept the van before it reaches the shop. Firstly, this permits me to ensure that all the pirujos, bolas, champurradas etc. that we buy are fresh, because the tienda-owner likes to pad out one's purchase with a few odds and ends left over from the morning, or even the previous afternoon. That's if she is willing to sell you any bread at all unless you have made a prior arrangement to reserve Qx from each delivery.** The bread that has not been firmly set aside will be sitting there in its basket, but she will be extraordinarily reluctant to part with it, perhaps because she will need it to add a few squishily stale rayaditas to tomorrows orders.

*In the case of red wine, she stopped stocking my preferred brand of Chilean plonk and instead started offering another label which costs Q15 more.

** This sort of lock-in might work for the majority of our neighbours — who are nothing if not slaves to routine — but our dietary habits and timetables are generally more flexible, so I want to be able to impulse purchase my bakery products.

And here's a chart from another continent that tells a scary story. Chinese GDP figures released this week might seem to suggest the possibility of a softer landing over there, but when you look at the way real GDP and nominal GDP have diverged since 2008, there are clear signs that things may actually be getting bubblier.

Today the can-kickers took it to another level, kicking the can with the can in it further down the road, via a de facto delay to the EU summit and the decision everyone kind of hopes it will come up with.

Meanwhile, MoneyGame published what it describes as the 'new scariest chart in Europe' (above), with the following commentary:

Greece, in a way, seems like a lost cause. Everyone knows it will default in some way or another. But while Greece might theoretically be ring-fencable, nobody thinks Italy is...

Sunday, October 16, 2011

Gold traders are reportedly more bullish about their prospects next week than they have been for several months.

Maybe they have heard the latest audio message from Rapture prophet Harold Camping who remains set in the view that the end will come before we've even said hello to 2012. Having been largely wrong about May 21, Camping has turned his attention to October 21, next Friday, which he cautiously predicts will be "the final end of everything".

This time "the end is going to come very, very quietly," Camping affirms, without such telegenic collateral effects as earthquakes, volcanic eruptions and catastrophic tsunamis.

And fortunately, "There will be no pain suffered by anyone because of their rebellion against God," (even commodity speculators), because "he has no pleasure in the death of the wicked."

Thursday, October 13, 2011

Having worked with companies like Shell that protect and venerate their brand/marque with a near religious devotion, this update from los Gutiérrezstrikes me as reckless, whatever its relative merits aesthetically.

When you choose to revamp rather than refresh you are often showing premeditated disrespect for those customers who have, in some cases, a lifetime's worth of emotional investment in your brand.

It matters less for B2B firms, but leading consumer brands always try to make iterative changes where there is something in the design that signals backward compatibility. I'm not really seeing it here.

I note that their main corporate website has yet to make the leap, so either PC intends to roll out the new image regionally (something one of the world's leading brand owners like Shell is unlikely to contemplate), or they are being a bit chicken, and want to test the waters in Texas with a potentially more yufe-ful customer base before admitting to a brand desecration back home in the motherland.

Wednesday, October 05, 2011

Fools' errands and fools' gold...is how leading American historian John W. Dower has characterised both post the 9-11 military-statebuilding adventures and the financial collapse of 2008.

These were parallel phenomena in his mind, because both were grounded in historical amnesia and an ideological commitment to the notion that we have somehow slipped the usual constraints, allowing free makets alone to take full control of both political and economic systems.

So perhaps it isn't so hard to see why some of our fellow Europeans have tended to regard the resulting mess as largely an 'anglo-saxon' problem. This allowed them to erect an imaginary Maginot line between themselves and the consequences of this anglophone shallow-mindedness, and now that it has been definitively breached, they are only just starting to realise how much trouble they are in.

When the crisis first broke regulators ordered European banks to increase their liquidity buffers and most of them did so by investing heavily in government bonds, seen then as comparatively risk-free as well as highly liquid. Meanwhile, believing that the problem lay elsewhere, the French and the Germans went about the recapitalisation of their banking system with a lot less enthusiasm than their US and UK counterparts.

Now almost half of the €6,500bn stock of eurozone sovereign debt is showing signs of heightened credit risk and this particular, highly interconnected part of the global financial infrastructure is surely carrying the greatest exposure.

BNP alone has a eurozone sovereign debt exposure of some €75bn, amounting to roughly 6% of total assets, including €14bn of Greek debt and €21bn of Italian government bonds. And that's just BNP. The other two major French banks, SocGen and Credit Agricole each have exposures of a similar order of magnitude. Collectively, French banks have €56bn of Greek sovereign bonds alone. They've so far only written down this Greek debt by around 20%, or in line with the restructuring agreed at the time of the last bailout.

"It’s kind of like being on a family safari: There’s a herd of elephants charging towards you, but your young kids just love the cute elephants and if you shoot them they’ll never forgive you. Yet if you don’t shoot them, there’s a very good chance the elephants will trample both you and your whole family. Welcome to the choices facing the leaders of the European Union."

Later in the article the author manoeuvres his elephantine prose into a new metaphor of impending yet (supposedly) avoidable calamity:

"There are some who argue that if Captain Smith had turned the Titanic into the iceberg and rammed it direct, the move would have damaged the ship but left it afloat while at the same time destroying his reputation. Today, Titanic would be a metaphor for a crazy captain who annoyed 2,223 passengers, instead of a maritime disaster. Europe’s leaders don’t need the benefit of historical hindsight. They can see the disaster coming and they know that the only way to save the ship is to go at it with overwhelming force, even if it destroys their political names in the process. The iceberg is looming out of the night. It’s time to decide."

Mexico is one of three nations which spring to mind sharing a pronounced pop-cultural obsession with efflorescent females.

Juan Carlos Lozano's video for his new solo roloNada Haces Por Mí, ever-present these days on Telehit, can be found closer to the tasteful French end of this slightly suspect scale than the pervy Japanese position at the other extremity. Lozano himself sits at the leading edge of Mexican ambient electro-pop/rock having headed up both Moenia and Morbo before setting off on his own with this catchy track.

Monday, October 03, 2011

"Living through a collapse is a curious experience. Perhaps the most curious part is that nobody wants to admit it's a collapse. The results of half a century of debt-fuelled "growth" are becoming impossible to convincingly deny, but even as economies and certainties crumble, our appointed leaders bravely hold the line. No one wants to be the first to say the dam is cracked beyond repair."

That was the opening paragraph from Paul Kingsnorth's Guardian piece last week, in which he sought to draw our attention back to the work of Leopold Kohr, for whom bigness was never a good thing. Most political and economic systems (even Communism) work well on a small scale, he believed, but once they grow become increasingly problematic. Kingsnorth thinks he may have been on to something...

"The crisis currently playing out on the world stage is a crisis of growth. Not, as we are regularly told, a crisis caused by too little growth, but by too much of it. Banks grew so big that their collapse would have brought down the entire global economy. To prevent this, they were bailed out with huge tranches of public money, which in turn is precipitating social crises on the streets of western nations. The European Union has grown so big, and so unaccountable, that it threatens to collapse in on itself. Corporations have grown so big that they are overwhelming democracies and building a global plutocracy to serve their own interests. The human economy as a whole has grown so big that it has been able to change the atmospheric composition of the planet and precipitate a mass extinction event."